BUENOS AIRES (Reuters) - Argentina's surprise plan to nationalize its private pension system caused chaos in local markets and spread gloom to other emerging markets on Wednesday as investors read it as a desperate government move to stave off default.
The plan, announced on Tuesday by President Cristina Fernandez, sent a ripple effect of fear about emerging-market investments into European stocks and Asian bonds.
Fernandez, who has repeatedly criticized financial markets for speculating rather than investing in real production, sent a bill to Congress for the state to take over the $30 billion in funds in the 14-year-old private pension system.
Fernandez defended the plan by saying that she was rescuing pensions from the global market crisis, but critics said her government was trying to get its hands on funds as it faces billions of dollars in debt obligations next year.
The plan is likely to pass Congress and be broadly popular in Argentina, where there is wide suspicion of the privatizations that took place during the 1990s when free-market reforms swept Latin America.
Local stocks took a 10 percent nosedive, accumulating a loss of 23 percent since reports of the pension plan surfaced on Monday.
Locally traded bonds dropped an average 11 percent in response to the plan, as the 10 investment funds to be nationalized are the country's largest institutional investors.
Economy Ministry officials met with the Senate budget committee on Wednesday and assured lawmakers that the government's 2009 budget was in good shape, despite concerns.
"The current account surplus and the fiscal surplus are guaranteed by the Argentine economy. The financial system is solid and liquid and we can say the (global) crisis will not affect us although it will imply some slowdown," Political Economy Secretary Martin Abeles told lawmakers, official news agency Telam reported.
Fernandez and her husband and predecessor Nestor Kirchner are center-leftists who maintained a fiscal surplus and high levels of foreign reserves while using price caps and foreign currency interventions to control some areas of the economy.
CLIMATE OF FEAR
Although she is not considered as left-wing as Venezuelan President Hugo Chavez and other socialist leaders in the region who have nationalized large parts of their economy, the pension takeover plan spooked people.
"Investors are extremely panicked. People start imagining things like Nestor and Cristina can start expropriating as if it were a war," said Eduardo Blasco, economist with Maxinver business consulting firm.
"If they're going to rob my house, I don't care if it's worth $200,000 -- if someone offers me $40,000, I take it because it's going to be stolen anyway," Blasco said.
Argentina's country risk, as measured by the JPMorgan Emerging Markets Bond Index (EMBI+) soared to more than 2,000 basis points before narrowing to 1,891 basis points, still a yawning spread between benchmark Argentine bonds and comparable U.S. Treasuries.
That risk level brought unwanted reminders of the time just before Argentina's historic 2001 default on $100 billion in debt, when the country went into a severe economic and political crisis.
Even though the pensions takeover would give the government more funds to tap to meet financing needs next year, the sovereign bond sell-off shows deep market skepticism over the country's medium- and long-term economic health.
The takeover of pensions "decreases the risk of default in 2009 and 2010, but what's complicated are the perspectives for the medium and long term," said the chief financial officer at an Argentine bank, who asked not to be named.
He said yields on short-term peso debt have shot up to more than 90 percent.
"The risk of default is overstated in the short term," the CFO said.
ANXIETY FROM MADRID TO MANHATTAN
In Spain, where many companies have investments in Argentina, concerns grew that South America's No. 2 economy could move to nationalize more sectors.
Shares in Spain's Repsol, which controls Argentine oil company YPF, tumbled 15.8 percent, and the company said its executives met with Argentine Planning Minister Julio De Vido, who assured them its investment plans were safe.
European shares slumped more than 5 percent, battered by a 9.9 percent fall in Spain's Santander, the euro zone's biggest bank, which has a unit in Argentina.
Asian bond spreads widened to record levels earlier on Wednesday on fears about emerging markets, including the news from Argentina.
On Wall Street, worries about Argentina's economy helped deepen the level of investors' fears about recession and contributed to a fast-moving late-day slide. The blue-chip Dow Jones industrial average lost 5.7 percent on Wednesday, while the broad Standard & Poor's 500 Index dropped 6.1 percent and the Nasdaq Composite Index slid 4.8 percent. Both the S&P 500 and the Nasdaq closed at five-year lows.
(Editing by Jan Paschal)
(Additional reporting by Walter Bianchi and Cesar Illiano in Buenos Aries and Carlos Ruano in Madrid)